SEC Sues Hedge Fund Manager for Mis-Use of Side Pockets
The SEC has filed a civil enforcement action against a hedge fund manager for failing to distribute gains from side pocket investments to investors. According to the complaint, the Defendants side pocketed certain investments which were valued at cost pursuant to the Partnership Agreement. However, as the investment made distributions, the Defendants used the proceeds for undisclosed related party transactions, rather than making distributions to investors within 30 days of receipt, as required by the Partnership Agreement. The Defendants concealed their alleged fraud from the third party administrator and investors.
OUR TAKE: The SEC has stressed the importance of transparency when a fund manager utilizes side pockets for illiquid investments. This case adds a new twist to the mis-use of side pockets i.e. side-pocketing income-producing investments and then diverting the distributions.
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